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Signature iSIGNATURE IISIGNATURE IIISIGNATURE IV-
DECLARATION We hereby declare that the project titled “Emerging Trends of Corporate Governance” is an original piece of research work carried out by us under the guidance and supervision of Mr. Harpal Singh. The information has been collected from genuine & authentic sources. The work has been submitted in partial fulfillment of the requirement of Master of Business Administration to IIPM, Delhi.
We are very grateful to Prof Harpal Singh for having given us an opportunity to undertake this project. The successful completion of this project would not have been possible without their generous cooperation. We would also like to thank the Department and people in the organization for sparing their valuable time and providing useful insights that have made my learning experience very fruitful.
INTRODUCTION Corporate Governance basically denotes rule of law, transparency, accountability and protection of public interest in the management of a company’s affairs in the prevailing global, competitive and digital environment. Government provides necessary conditions, framework and environment to corporate to operate. Organization for Economic Cooperation and Development(OECD) Principles on Corporate Governance in May 1999. After 1990, the transition from central planning to market driven economies, the privatization of state-owned companies and the emerging private sector necessitated reforms in corporate governance. This need was further accentuated by the fall-out of the 1997 economic and financial crisis. Globalisation of the market place has also impelled corporate to improve the quality of their governance. Nowadays, it is imperative that corporate governance standards are compatible with global standards which are much higher than those prevalent in India. A number of Indian companies are restructuring to become multinational by investing abroad and opening up their branches or subsidiaries. They are now competing with MNCs of developed countries in terms of quality and cost. The Indian share market can now boast of not only higher stock prices but also better governance in terms of shorter settlement, better margins, tighter listing and debt norms. The GDP is growing at a healthy rate and exports are outpacing GDP. A stronger Indian rupee has made dollar imports cheaper thus further fuelling growth. In such a positive scenario, it became imperative that the Government introduce new reforms for better financial management of the economy. The Fiscal responsibility and Budget Management Bill of 2000 was one such step. The 1992 stock market scam, however, was a start reminder to the Central Government that all was not well. Various laws were framed or amended to protect the interests of shareholders and stakeholders towards good corporate governance in India. The securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is a step in the right direction to promote new confidence in the corporate sector. SEBI reconstituted the Bhagwati committee to review the takeover regulations and provisions in order to make them more effective and efficient. Economic and financial liberalization has been a strong driving force in emerging corporate governance in India. The process was initiated by by Rajiv Gandhi in 1980s but really gathered momentum in 1991 under the tutelage of PM Narismha Rao and FM Manmohan Singh and successive government have generally supported the reform process. REFORM OF FINANCIAL SECTOR The first noticeable attempt was undertaken with the release of the Chakravarthy Committee Report in 1985 was followed by the Narasimhan Committee Report in 1991 for reform in the banking sector and capital market. A number of steps were initiated by the Government in 1992 to develop transparent and efficient capital and money markets. Bureaucratic controls have been largely removed in the areas of trade and industrial policy, allowing corporates to govern their affairs in a liberal manner. The real opening-up of the economy started with the new Industrial Policy on June 24, 1991. This introduced relaxations in industrial licensing, foreign investments , transfer of foreign technology and monopolies and restrictive practice laws. The strict Monopolies and Restrictive Trade Practices Act of 1969 was replaced by the liberal Competition Act of 2002, allowing large business houses to expand further. Industrial delicensing resulted in a spurt of private sector investment and corporate restructuring. Additional reforms were introduced in taxation, share markets, foreign joint ventures and infrastructure in the light of this sudden growth. The growth in the private sector has mushroomed beyond all expectations as most restrictions and licenses have been relaxes. Truly, the new Corporate India is beginning to resemble its counterparts in the developed Western world, with free enterprise and deregulation in the order of the day. LIBERALISATION OF FOREIGN INVESTMENT Both foreign direct investment FDI and foreign portfolio investment have seen major spurts. The rigorous Foreign Exchange Regulation Act(FERA) of 1971 has been replaced by the liberal Foreign Exchange Management Act(FEMA) of 1999. This has resulted in a slew of
foreign companies and investors showing great interest in corporate India . Safeguards were introduced to protect these investors.
INDIAN SAVER- “THE SAVIOR OF CORPORATE INDIA” Upto the 1980s, the common Indian saver would be content to put his money in banks and earn what ever interest was available. With the lifting of restrictions, however, the equity and security markets have taken off in a big way. The Indian saver has jumped on the bandwagon and is pumping his savings into Corporate India to gain higher returns. New regulations have been introduced to safeguard the interests of this new band of investors. NEW SAFEGUARDS FOR INVESTORS With this huge inflow of funds into Corporate India, it became necessary to introduce reforms in its financial infrastructure. Institutions such as stock exchanges and custodial services were set up, monitors such as credit rating agencies, auditors and supervisory authorities were established or strengthened, accounting standards and disclosure laws improved and bankruptcy and contract law were made more effective. Following these reforms, large numbers of financial institutions, foreign banks and mutual funds have entered the market. EXAMPLES OF CORPORATE GOVERNANCE There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance ENRON Case The Company discloses that it overstated its earnings by $567 million since 1997. Two company officials are fired. Enron, once one of the world's largest electricity and natural gas traders, files for Chapter 11 bankruptcy protection. Sloppy board oversight, imaginative accounting, off-balance sheet financing, and a criminal CFO are some of the reasons which was by the media. But it is more of come to mind. But those are superficial, not decisive, at root more consequences than causes according to an analyst.
Enron did not fail because of creative bookkeeping, for instance, but was creative in bookkeeping because it was failing. Enron collapsed chiefly because its managers were paid to aim at the wrong financial measures, and consequently, its internal system of financial controls was a shambles. SATYAM Saga On January 7,2008 Ramalinga Raju tendered his resignation and confessed to a close to Rs 7,800-crore accounting fraud. The episode has international ramifications. Satyam serves as the back office for some of the largest banks, manufacturers, and healthcare and media companies in the world, handling everything from computer systems to customer service. Shareholders have lost Rs 13,600 crore in Satyam shares in less than a month. The market capitalization fell to Rs 1,607.04 crore on January 9, 2008, from Rs 15,262 crore at the end of trade on December 16, 2008, the day when Satyam had announced the Rs-8,000 crore acquisition deal of two firms promoted by the kin of the IT firm’s former chairman Ramalinga Raju. According to the recent New York Times report, “Investigators looking into the fraud have found a maze of about 300 companies related to Raju that were used to siphon as much as $1 billion in cash from Satyam. From the very latest investigation news from Andhra Pradesh police who has Raju(Satyam CEO) in custody revealed a more interesting tactic used to loot the money. Out of 53,000 employees, 10,000 employees were fake and money was laundered through the fake 10,000 paychecks every month. ROLE OF LEGAL SYSTEM The legal system of a country plays a crucial role in creating an effective corporate governa nce mechanism in a country and protecting the rights of investors and creditors. The legal environment encompasses two important aspects – the protection offered in the laws (de jure protection) and to what extent the laws are enforced in real life (de facto protection). Both these aspects play important roles in determining the nature of corporate governance in the country in question. Recent research has forcefully connected the origins of the legal system of a country to the very structure of its financial and economic architecture arguing that the connection works through the protection given to external financiers of companies – creditors and shareholders. Legal systems in most countries have their roots in one of the four distinct
legal systems – the English common law, French civil law, German civil law and Scandinavian civil law. The Indian legal system is obviously built on the English common law system. Researchers have used two indices for all these countries – a shareholder rights index ranging from 0 (lowest) to 6 (highest) and a rule of law index ranging 0 (lowest) to 10 (highest) – to measure the effective protection of shareholder rights provided in the different countries studied. The first index captures the extent to which the written law protected shareholders while the latter reflects to what extent the law is enforced in reality. In India, enforcement of corporate laws remains the soft underbelly of the legal and corporate governance system. The World Bank’s Reports on the Observance of Standards and Codes (ROSC) publishes a country-by-country analysis of the observance of OECD’s corporate governance codes. In its 2004 report on India 23 , the ROSC found that while India observed or largely observed most of the principles, it could do better in certain areas. The contribution of nominee directors from financial institutions to monitoring and supervising management is one such area. Improvements are also necessary in the enforcement of certain laws and regulations like those pertaining to stock listing in major exchanges and insider trading as well as in dealing with violations of the Companies Act – the backbone of corporate governance system in India. Some of the problems arise because of unsettled questions about jurisdiction issues and powers of the SEBI. As an extreme example, there have been cases of outright theft of investors’ funds with companies vanishing overnight. The joint efforts of the Department of Company Affairs and SEBI to nail down the culprits have proved to be largely ineffective. As for complaints about transfer of shares and non-receipt of dividends while the redress rate has been an impressive 95%, there were still over 135,000 complaints pending with the SEBI. Thus there is considerable room for improvement on the enforcement side of the Indian legal system to help develop the corporate governance me chanism in the country.
CORPORATE GOVERNANCE IN BANKS Nowhere is proper corporate governance more crucial than for banks and financial institutions. Given the pivotal role that banks play in the financial and economic system of a developing country, bank failure owing to unethical or incompetent management action poses a threat not just to the shareholders but to the depositing public and the economy at large. Two main features set banks apart from other business – the level of opaqueness in their functioning and the relatively greater role of government and regulatory agencies in their activities. CORPORATE SOCIAL RESPONSIBILITY There is a flip side to the story of massive growth in Corporate India. As you know, these are the years of E-commerce, cost cutting, redundancies, mergers and acquisitions, hostile takeovers and development in communication technology. Power games are the fabric of the current Global Economic Structure which encourages competition. Only the best will win and survive, but the not-so-lucky will fall by the way side. There is a human price to pay for all this growth. Emerging out of this are other matters of game concern. Corporate Governance must also factor in the possibilities of corporate fraud, abuse of managerial power and accept full Corporate Social Responsility for all its actions. The new form of Corporate Governance is a combination of ethical, physical, financial, emotional, mental and spiritual intelligences. Corporate Governance of the 21st century is nothing if not only about making money for shareholders but also about improving the quality of life of its employees and society at large. People in power in corporations direct, monitor and lead corporations in a human manner. The Companies Act, 1956 and the Listing Agreement The opening of the Indian economy and the necessity to have good corporate governance, made the government of India to take number of steps through suitable provisions in the Companies Act, 1956 and through the Listing Agreement. If a company intends to offer its shares or debentures to the public for subscription by the issue of a prospectus, it must, before issuing such prospectus, apply to recognized stock exchange for permission to have the shares or debentures intended to be so offered to the public to be dealt with in stock exchange in terms of section 73 of the Companies Act, 1956. Section 73 of the
Companies Act makes listing compulsory where a company makes a public issue of shares or debentures by prospectus. It may be noted that Securities Contract (Regulation) Act, 1956 does not make listing of securities compulsory. The listing agreement is required to be complied by only listed companies with stock exchanges in which the concerned company’s shares are listed. While the requirements in relation to corporate governance set out in the Companies Act apply to all companies and the Department of Company Affairs administrates the Companies Act; the listing agreement apply to listed companies and is administered by stock exchanges under the supervision of SEBI, i.e., under the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992. The requirements in the listing agreement are inserted through the directives issued by the SEBI to which the Ministry of Finance has delegated powers. The number of requirements under the Companies Act and in the listing agreement is uniform, but on some major aspects, including the composition of the board, they vary. This obviously creates practical problems for listed companies. SEBI has put a modern regulatory framework with rules and regulations governing the behaviour of major market participants such as stock exchanges, brokers, merchant bankers, and mutual funds. It also regulates activities such as takeovers and insider trading which have implications for investor protection. SEBI has liberalized the regulation of new issues, including allowing book building. It has also increased information requirements for listed shares. The governing structure of stock exchanges has also been modified to make the boards of exchanges more broad based and less dominated by brokers. CONCLUSION With the recent spate of corporate scandals and the subsequent interest in corporate governance, a plethora of corporate governance norms and standards have sprouted around the globe. The Sarbanes-Oxley legislation in the USA, the Cadbury Committee recommendations for European companies and the OECD principles of corporate governance are perhaps the best known among these. But developing countries have not fallen behind either. Well over a hundred different codes and norms have been
identified in recent surveys and the ir number is steadily increasing. India has been no exception to the rule. Several committees and groups have looked into this issue that undoubtedly deserves all the attention it can get. In the last few years the thinking on the topic in India has gradually crystallized into the development of norms for listed companies. The problem for private companies, that form a vast majority of Indian corporate entities, remains largely unaddressed. The agency problem is likely to be less marked there as ownership and control are generally not separated. Minority shareholder exploitation, ho wever, can very well be an important issue in many cases. Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level. More and more it appears that outside agencies like analysts and stock markets (particularly foreign markets for companies making GDR issues) have the most influence on the actions of managers in the leading companies of the country. But their influence is restricted to the few top (albeit largest) companies. More needs to be done to ensure adequate corporate governance in the average Indian company. Even the most prudent norms can be hoodwinked in a system plagued with widespread corruption. Nevertheless, with industry organizations and chambers of commerce themselves pushing for an improved corporate governance system, the future of corporate governance in India promises to be distinctly better than the past.
BIBLIOGRAPHY WWW.GOOGLE.COM WWW.FICCI.COM www.scribd.com company law reforms-ministry of commerce & industry
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